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Blowout jobs report puts ball back in Fed's court

While there are still 40 days and a minefield or three to negotiate until the next Federal Reserve meeting, traders already believe they know what's going to happen.

Friday's nonfarm payrolls report, which showed the economy created 271,000 new jobs in October while the unemployment rate fell to 5.0 percent, fueled what has been a dramatic turnaround in expectations for monetary policy.

Traders now are pricing in a 70 percent chance of the first rate hike in more than nine years at the Dec. 15-16 Federal Open Market Committee meeting. Just a month ago, the probability was barely 5 percent, and it was about 33 percent as of the September FOMC meeting.

If conditions stay amenable to a hike, it will mark the beginning of a new era for investors. Financial markets have enjoyed a funds rate anchored near zero from a central bank that also injected $4.5 trillion in liquidity through its quantitative easing program that ended in October 2014.

Fed Chair "Janet Yellen has to be breathing a huge sigh of relief," said JJ Kinahan, chief strategist for TD Ameritrade. "Think back to June or July: How many times did she say we're going to raise rates in 2015?(The payrolls report) is making her look brilliant."

Federal Reserve Chair Janet Yellen
Mary Schwalm | Reuters
Federal Reserve Chair Janet Yellen

Maybe so, but the picture can change quickly, particularly in the case of a Fed that has kept the market on edge because of the mixed signals it has been sending.

Read More This is the real reason the Fed might hike rates

After all, many on Wall Street had figured on the Fed to begin its hiking cycle back in March. But market volatility spurred by concerns about a slowdown in China and uneven data at home made each FOMC meeting essentially a false alarm and another exercise in the fruitless search for perfection. All this while Fed officials delivered a stream of contradictory public statements regarding policy.

Even Friday's futures trading reflected some misgivings. Earlier in the session the probability for a hike jumped all the way to 74 percent before easing back to 68 percent.

"With the FOMC bent on delivering their first move before year-end, they are less concerned with the details than the optics and the optics of this report are quite strong," said Steve Blitz, chief economist at ITG. "To say the details are strong enough to wipe out concerns the economy has shifted to a lower pace of expansion is, however, a bit of an overstatement."

Indeed, much can go wrong by the Fed's December meeting, which concludes with a statement on the direction of policy.

Read More What's the real unemployment rate?

October's report presented a multitude of positive points, from the strong headline number to the 2.5 percent increase in average hourly wages to an increase of 313,000 in the labor force at a time when the participation rate remains mired around 1977 lows.

However, there is still one more payrolls report before the meeting, and there's at least some question over whether the October number was a true return to strength for the jobs market or an anomaly after two consecutive poor reports.

Revisions to August and September added only 12,000 jobs to what had been weak reports that fueled speculation the Fed wouldn't move until March 2016 at the earliest. Should November's numbers, due on Dec. 4, revert, that could shift expectations, particularly if wage growth disappoints.

"One data point does not make a trend, thus, this morning's strength in hiring will need to be confirmed by the November report at the very least," said Lindsey Piegza, chief economist at Stifel Fixed Income. "After all, today's strength comes against the backdrop of back-to-back months of weakness in August and September, so this new presumed trend of improvement will need at least a second month of confirmation."

The Fed won't just need confirmation from the economy. There's also the market to consider.

Read MoreFed's Evans: We may be ripe for rate hike, but...

The FOMC opted not to pull the trigger in September based ostensibly on concerns about international developments, but also was up against a market that made it clear it wasn't ready for a move.

Since then, stocks have rallied sharply, led by a 7 percent gain in the financial sector over the past month that has included, importantly, a 9 percent surge from rate-sensitive bank stocks. Banks also were the best performers in an otherwise lackluster market day Friday, rising 2.7 percent by midday.

If the markets hold in, expect the Fed to move.

"That the Fed might raise rates in December does not make us more or less bullish on the equity markets," David Donabedian, chief investment officer at Atlantic Trust Private Wealth Management, said in a statement. "While easy money has been the biggest source of the bull market in recent years, a slow rise in interest rates is not a case for a bear market."